Thank You

Error.

Any president's report on the State of the Union is driven by politics more than by logic or practicality. No matter the president's party or predilection, his speech must supply some rhetorical treats demanded by his most loyal supporters. Some such proposals will never be heard of again; others are trotted out to be defeated every year. Worst of all, some are enacted, over and over again, without effect.

In the last category is the federal minimum wage. It is a shibboleth of the Democratic Party and its political economists that laws and union contracts raising wages do nothing except enrich the workers. They do not harm employers; they do not reduce the number of low-paid jobs; they do not raise the prices of goods and services that require low-paid workers to produce and they help a lot of folks.

President Barack Obama endorsed these claims in his State of the Union speech last week: "Let's declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour. This single step would raise the incomes of millions of working families." The president also said it would be cost-free, or even beneficial: "For businesses across the country, it would mean customers with more money in their pockets."

If these things were true, economics would not be known as the dismal science, and every American could eat a free lunch.

Who Gets What, and Why

Let's start to parse the president's claims by dismissing the preamble: The wealth of the nation does not determine the appropriate wage employers should pay anybody, whether they are floor-moppers or CEOs. The wealth of the employer and the need of the employee are the proper determinants. Rich and poor nations can force different policy decisions, and a mandated $7.25 an hour may be a poverty wage in one country and a professional salary in another.

Nearly all Americans who work full time do not have to live in poverty; the Census Bureau says less than 3% of people who have full-time work for a whole year live under the poverty line. Unemployment, not the absence of $1.75 an hour, is the greatest of the problems creating poverty—and it should be clear that a minimum wage does not raise the income of an unemployed person or improve his chances of getting a job. It's also important to know that poverty statistics ignore the cash value of such antipoverty benefits as the Earned Income Tax Credit, food stamps and housing subsidies.

The clearest predictors of a person's future life in poverty include inattention and poor attendance at school, dropping out of school without a high-school diploma (or finishing school with a worthless piece of paper instead of a high-school education) and having children before establishing a two-earner household with another adult. Working for minimum wage is more likely to indicate that a person has a chance of working his way up to higher wages and out of poverty.

Two Catches

The president's goal of raising the incomes of millions of families though a a minimum-wage increase is possible, though the claim requires at least two footnotes. It would be necessary to count the teenage workers whose added income would bring more money to their middle- and upper-class families. And to get an accurate number for the net change in family income, it would be necessary to subtract lost income for some number of families whose members working for the minimum wage were laid off, ordered to work fewer hours, deprived of fringe benefits or taken off the books entirely. To repeat, unemployment is the greatest of the problems creating poverty.

Although some businesses might happily greet the arrival of customers with more money in their pockets from a higher minimum wage, the president should recognize there will be other businesses with less money in their checking accounts after paying the higher wage and the higher associated taxes.

These would not necessarily be the same businesses, but it would be the same money recycled, and it would be money not available to pay someone else. To repeat, unemployment is the greatest of the problems creating poverty.

Like a union contract, a minimum wage can boost the wages of every existing worker, but only by excluding people who want to work for less. The "scabs" created by the minimum wage are those who work for cash in the rapidly growing underground economy, those who raise their real wage by avoiding taxes and those foreign workers who hail the arrival of American business on their shores as an opportunity to have a better job.

A Hidden Advantage

Labor compensation should be a matter of free business owners compensating each employee according to the value they add to their employers' businesses. In the past century, it has become more and more a matter of political taste: Idealists have set moving targets for the amount of income equality that the government should engineer. In America, there has been some of both for more than a century—a tug of war between markets and an antimarket philosophy.

As an economic stimulus, the minimum wage has one limiting feature that clearly can appeal to responsible people. Unlike deficit spending to help the poor, the minimum wage clearly extracts money from one set of citizens and pays it to another set. The books balance; the benefits or damages from the transfer can be measured with some accuracy.

But with deficit spending, the aid for the poor is extracted from posterity, a more perfect target since its members are unrepresented in the councils of state and cannot express their justifiable outrage.

In the 18th century, Sir Boyle Roche asked the Irish Parliament, "Why should we put ourselves out for posterity? What has posterity ever done for us?"

The issuance of government debt, like the government's redress of income inequality, was then in its infancy, but Roche's conundrum is more relevant than ever. So is one of his great recommendations: "Every pint bottle should contain a quart."